Polymath, visionary and indefatigable change agent. Founder of Polymathica, a global community of intellectual sophistication, The Polymathic Institute, which promotes polymathic research, education, careers and lifestyles, The Polymath, a weekly PDF magazine of erudite analysis and commentary. Pages describe my original work.

The Death of Capitalism

One of
the most dramatic events of the Transformation is 'The Death of
Capitalism.' This does not mean the death of free enterprise or robust
equity markets or entrepreneurship or the triumph of socialism, globalism or
any of the several technocratic 'moneyless society' theories floating about the
Internet. Specifically, it means that the share of equity in earnings and
net assets that is apportioned to those who provide financial resources will
fall to relative insignificance as most of the equity will be apportioned to
those who provide knowledge, human, relationship and entrepreneurial
capital. This death of the rules of financial capitalism and the rise of
the new rules of knowledge capitalism will completely reshape the financial
markets, in fact, of society as a whole.

Consider
the chart below. Because many companies are retaining cash, cash
equivalents and short term investments that are large enough to distort the
financial ratios, they have been removed from the equity and from the
market value and Net Income has been reduced by 4% to reflect an imputed after
tax return on the removed current assets. Financial Analysts who fail to
adjust for this non-employed capital will likely miss just how dramatic the
current events are.

BV/Share

EPS

ROI

Market to Book

Industrial
Age Companies

General
Electric

3.48

0.63

18.10%

3.1

Exxon

26.33

5.55

21.10%

2.7

Walmart

15.31

3.92

25.60%

3.3

Average

15.04

3.37

22.38%

3.0

Information
Age Companies

MicroSoft

0.42

2.12

504.20%

54.5

Cisco

0.99

1.08

109.00%

13.6

Apple

24.24

14.03

57.90%

12.3

Google

31.22

20.44

65.50%

15.9

Average

14.22

9.42

66.24%

24.1

*Data
taken from audited financial statements and market statistics as of 12/09/2011

The dramatic difference in performance
between the Industrial Age and Information enterprises is in no way a
fluke. In fact a theoretical consideration of the factors involved leads
to almost identical results. Below I show the traditional Industrial Age
Balance Sheet based upon the preferred financial ratios, say, of around
1980. Return on Sales is 5% and the Financial Ratios were taken mostly
from here. Next to it are the new, generally accepted
Information Age expectations.

Per
Million $ of Earnings

Industrial

Information

Accounts
Receivable

$3,333,333

$1,000,000

Inventory

2,000,000

200,000

PPE
and Other LT Assets

6,000,000

2,500,000

Total
Assets

11,333,333

3,700,000

Current
Liabilities

2,666,660

600,000

Long
Term Liabilities

4,333,340

1,500,000

Total
Liabilities

7,000,000

2,200,000

Net
Book Value

$4,333,333

$1,500,000

Return
on Book Value

23%

67%

When this is properly understood, this
information is Earth shaking. IT is dramatic and it changes
everything. This fundamental change will cascade throughout all financial
markets, both debt and equity, both public and private, leaving nothing
remotely like it was before.

Consider a new
Industrial Age start up, with a capital infusion of $1,000,000 that grows for
ten years at its equity constrained rate of 23% and at the end, has a Market to
Book Ratio of 3:1. It will, at the end of the ten years have a market
value of $1,000,000 X 1.23^10 X 3 =$23,777,838. Now consider an Information Age company with
the same initial $1,000,000 but it instead grows at its equity constrained rate
of 67% and at the end has a Market to Book Ratio of 12:1. Its ending
Market Value will be $1,000,000 X 1.67^10 X 12 =$506,157,838!

Now let's look at it
the other way around. Suppose there is a ten year old Industrial Age
company that currently has a Market Value of $1,000,000,000. With the
same equity constrained growth rate and Market to Book Value ratio, its initial
equity would have needed to be $1,000,000,000 / (3 X 1.23^10) = $42,055,968. Now
consider the Information Age enterprise above. Its initial equity would
need to have been $1,000,000,000/(12X 1.67^10) = $493,917.The
first is a major Venture Capital event. The second can be funded by small
investors through a Reg D.

Now, as an
entrepreneur or investor or just a person who intends to live in the future,
this should blow you away. If it doesn't, you don't quite understand it
yet. You may want to take a few minutes and review what you have read.

As rates of return
for PPO's increase, as they will, the number that become available will
increase dramatically, as well. Over the next thirty years, household
incomes will explode and the additional purchasing power will be spent
primarily in design value added, content and other forms of Information Age
GDP. In other words, little of the growth in GDP will go to Industrial
Age enterprises. Rather, it will create an explosive growth in
Information Age enterprise formation.

It will
also precipitate a profound and tumultuous reformation of the equity and debt
markets. A few of the more significant events will be:

As investors recognize the
substantially higher sustainable growth rates and ROI's that are now
characteristic of Information Age enterprises, investment dollars will
flood to the start-up and early round private equity market. The
expectation for young, aggressive investors will be that they can turn
$10,000 into $10,000,000 in 10 years or less. As widely reported,
muralist David Choe, by accepting facebook stock in lieu of payment turned
$60,000 into $200,000,000. While the value of facebook stock is
proving to be very volatile, Mr. Choe is staying well above the target of
10K à 10M in 10 yrs. The establishment will, understandably, launch
a dissuasion campaign. In fact, it is already doing so against the
recent startu-up enabling JOBS legislation. However, in the face of
many success stories, it will be largely unsuccessful and we will
experience a kind of 'Private Equity Gold Rush.'

As markets continue to fragment and
experience accelerating change, rigid and hierarchical corporations will
not be able to adapt and will be replaced by networks of smaller, more
autonomous enterprises that share markets and some resources but are
individually financed and operated. Anyone who as ever gone through
a mega-corporation reorganization, knows just how disruptive they
are. They often take years to pay for themselves, but as the
Transformation continues, they will increasingly be outdated before they
are completed. Consequently, many of the existing mega-corporations,
responding to these pressures, will undertake massive divestiture or
'spin-off' programs in order to transform themselves into the more
adaptive Enterprise Networks. This rapidly increasing supply of success
prone, small, newer businesses will significantly increase the supply of
quality PPO's for investors.

While the number of PPO deals will
increase rapidly, the amount of funds chasing them will grow even
faster. Funds will leave the public secondary markets, from the debt
market and from the commodity markets. Also, rather than
concentrating on 'exit strategies', which will simply require reentry into
the ever more competitive private equity primary offerings market, private
equity investors will choose to stick with the 60%+ dividend streams of
their current investments. The buy and hold strategy will come to
dominate and the primary efforts will be put into finding quality
investment opportunities for the smaller, but still very significant,
dividend stream of these mature enterprises.

The publicly traded secondary
equity markets will enter into a very long term bear market. This
will be caused by a simple demand shortage as investment dollars
preferentially chase private equity positions. However, it will also
be caused by falling P/E ratios as total shareholder return will need to
increase in order to compete with the very high returns characteristic of
the private equity markets. 401(k) pension funds and their
counterparts in other countries will find that annual contributions are
taken up entirely with replenishing capital losses.

As the capital required to create
a start-up or to fund its growth continues to fall, the emphasis in the
ventures industry will shift from its supply of financial capital to the
value of its knowledge base. The equity requirements are small and
readily available. The value-added will be in identifying and
assisting quality start-ups. We will move from an era of Venture
Capital to one of consultative 'investment angels.' Many fund
managers will migrate toward fulfilling the Treasury function within an
Enterprise Network.

Because, compared to today, the
demand for early round private equity investment opportunities will far
exceed the supply, quality entrepreneurs residing within success prone
Enterprise Networks will be in the stronger bargaining position.
When, as in the Industrial Age, it required $42 million to fund a start-up
that will be worth $1.0 billion ten years later, the investors could
demand a significant portion of the equity. When, in the Information
Age, the same company only requires a $500 thousand of equity infusion,
the entrepreneur can demand a significant portion of the equity. This will
translate into private equity investors bidding up the share value of
start-ups and early round PPO's.

With the advent of crowdfunding,
$10,000 or less can get a person into a start-up, the number of people
playing in the PPO markets will increase dramatically. 401(k)'s will
be rolled over into PPO IRA's. Pressure will be placed upon
employers to have PPO options in their 401(k). However, reacting to
the very high rates of return of the Information Age enterprises, very
quickly literally millions of people will build million dollar plus
portfolios.

The Income Explosion created by
the explosion in new Information Age start-up ventures will be highly
deflationary, requiring central banks to engage in aggressive quantitative
easing policies. As it becomes clear that ‘printing money’ is
required just to stay even, world gold prices will collapse as, again,
funds will migrate from the precious metals markets to the PPO's.

With the supply and demand
function so heavily favoring the entrepreneur, the 'gold rush' will lead
to an Private Equity bubble as investors become more forgiving of
entrepreneurs who lack capital, experience or have a problematical
business model. As during the housing bubble, when almost anyone
could get a mortgage, almost any start-up will be fundable.

The central banks, faced with
persistent deflation will need to keep discount rates very low and also
engage in other QE strategies that may include the purchase of not just
government bonds but also corporate bonds. By doing so, they will
lower the yield on debt instruments and make them relatively unattractive
to the private investor. As happened during the housing bubble,
banks will borrow money specifically to invest in debt markets as the
spread remains high. This is very subtle, but very important.
In essence, the debt markets will be socialized.

All of this liquidity at low cost
will stimulate the implementation of productivity enhancing
technologies. This will increase profits, but also speed up the
Transformation and intensify the Industrial Age Apocalypse.

From a
somewhat more theoretical perspective, what we are seeing is the death of
capitalism, defined as the concept that equity in net assets and earnings
accrue to those who contributed the financial capital. Accounting
principles and practices as interpreted by FASB and IFRS, are built around this
assumption. However, if an Information Age enterprise has a Market to
Book Ratio of 12:1, it means that only 8.3% of Market Value resides in
financial capital. The remaining 91.7% resides in non-financial value,
ideas, knowledge, relationships, etc.

Even
today, the aspiring entrepreneur with a head full of good ideas but a thin
wallet often feels that the Venture Capitalist or Investment Angel is bringing
the primary value-added with their investment. Frankly, many investors
still share that attitude. So
today, we have a disconnect between the attitudes of investors and the
realities of the markets. Over time, and not that much time at
that, the attitude will necessarily change. Aspiring entrepreneurs will
unabashedly come to the table with the sense that they have substantial equity
with which to bargain. As we will explore later, a Klout ‘reach’ may have
a specific value based upon the more detailed ‘scoring’ that Klout now provides
and will like improve over time.

In the very
near future, investors and entrepreneurs will come to the table within an
Enterprise Network. An Enterprise Network is defined as a private and
bounded, opportunity rich and success prone productive environment and during
the Transformation will, for the most part, replace the hierarchical, publicly
traded corporation as the dominant enterprise structure. To restate and
emphasize, Corporations will not protect you from the Industrial Age
Apocalypse. In fact, they will often be ground zero. Indemnification
is to be found in an Enterprise Network.

Most
Enterprise Networks will be created to capitalize upon a specific market,
technology or industry. For example, rather than an Industrial Age News
Corp, an Internet News and Entertainment Enterprise Network will create an
enabling, success
prone enterprise environment for independent projects and offerings. Most will
be niche or demographically defined. Entrepreneurs who join these
Enterprise Networks will have ready access to investors, advisers, collaborators
and, most importantly, customers. Of course, no enterprise environment,
no matter how success enabling it may be, can make a bad idea succeed.
However, this structure removes most of the impediments that can cause good
ideas to fail.

This completely
changes the dynamic in several ways. By creating a bounded productive
environment created to capitalize upon specific characteristics of the
Transformaiton, investors will be generally knowledgeable on the factors that
influence success. The aspiring entrepreneur will need to convince the
investors of the quality of the business model, however, they will not need to
educate the investor on the anticipated changes in the market, technology or
industry upon which the plan is based.

The
investor understands and accepts these premises or they wouldn't be
there. Additionally, in a market that is pushing the limit on start-ups,
the success prone nature of the Enterprise Networks will help satisfy the
investors' risk concerns. The same is true of potential collaborators,
advisers and customers. So rather than being a constant uphill battle,
enterprise formation is facilitated.

While
Enterprise Networks will facilitate and improve enterprise success, they are
far from a guarantee. Each business model still must be assessed based
upon the cultural, social, political and economic future within which it will
operate. Clearly, the challenge for both the Information Age entrepreneur
and investor is to properly assess the likely course of the Transformation and
its likely impact on specific enterprises. The opportunity that looks
wonderful today can easily be overtaken by events and be completely non-viable
a few years later. Other enterprises that do not look very attractive
today can play right into the Transformation and be world beaters a few years
later.

Nobody
can decrease the very substantial risk of an uncertain future to zero.
Such crystal balls simply don't exist. However, all knowledge of futurity
is not equal. To say otherwise would be to say that because nobody can
know for certain the result of tonight's game, that the professional sports
handicapper's odds of being correct are no better than the guy down the
street. Of course that is untrue. It is not perfect knowledge of
the future, but it is superior knowledge of futurity.

3 comments:

Michael, I think you have whacked some of the things going on in the economies of the world right on the head. We are in a fundamental restructuring and rethinking of the Global Economic Paradigm---and we are going to get to see it play out in our lifetimes. This is going to be interesting. The Age of the "Dinosaurs" is ending. This will be interesting ideed.

It astonishes me that even those in the industry seem to be missing just how profound this is going to be. I think that when you have spent your whole career thinking inside the box it is hard to even see outside of the box, much less think there.

I imagine the world like a packed opera theater on fire. There are four named exits. Work, play, education and exploration. The only door that operates within our system right now is work, but that door is barely serviceable anymore and only fits one person at a time. The other three are blocked from the other side by mountains of debt, red tape and weapons. On the upper level of the theater, there is a fireproof balcony where world leaders, politicians and aristocracies argue loudly over whose pile is bigger, whose God is more righteous, whose weapons are the deadliest or which imaginary line on the theater floor was stepped on by whom. Instead of lowering the ladders and tossing down fire extinguishers, they would rather continue arguing and let the people crush themselves trying to escape. Because of the internet, all the people on the bottom can now see this behavior and are doing searches to find out how to grow their own ladders and make their own wings and build their own fire extinguishers. If the owners of the balcony don't start helping out, they're going to start getting their proverbial teeth kicked in by some really pissed off people wearing homemade wings.

Join The Polymathic Enterprise Network

We are searching for 150 founders by year end 2017. By paying for one year Membership in The Polymathic Institute, you will receive lifetime membership. This is an opportunity to build a finely crafted life as a Polymath. To learn more, read the page, Polymathic Institute Founding Members.

Membership e-mail

Michael W. Ferguson

Polymath, visionary and change agent

A home for the intellectually sophisticated

Subscribe to The Polymath

The Polymath is the official publication of Polymathica, a global community of refinement and erudition, and The Polymathic Institute, which promotes polymathic research, education, careers and lifestyles. It also promotes projects designed to be remediation for the Inappropriately Excluded.

Your referral code is 32950. It is used to track the source of our new subscribers.

Polymathica Social Media

Register at http://polymathica.network-maker.com and join me at 'Remediation for the Inappropriately Excluded' group. I am aggressively building a series of professionally curated discussion groups and related fora.

Polymathica is a growing, global community of refinement and erudition and a nascent, Information Age Culture of Affluence.

Polymathican Blogs

Remediation Resources

Experiment.com will be a useful tool in our goal of remediation for Polymaths and the inappropriately excluded. While this site provides a good format for funding independent research, it is not going to provide an adequate supply of funders. However, by utilizing our contacts in Polymathica we can move forward in the Polymathic Institute's goal to promote polymathic research and secondarily, polymathic careers.

Fundable.com for many this will be the best crowdfunding platform for equity offerings. Their charge is $179 per month. Of course, the payment processing fee of 3.2% to 3.7% is extra. Still, a three month, $500,000 offering will only have a total cost of around $18,000 to $20,000 far below the 9% to 10% of most platforms. Of course, like all equity funding sites, you will need to bring most of the investors yourself. That is where P.E.N. comes in.

My Quotes

From time to time I post something that deserves more than ephemeral exposure. When that happens, I post it here.

Career Advice

You can't earn a living telling people how things are or how they will be. You earn a living by feeding their confirmation bias. That is not a career to which one should aspire.

On Fools

I really have attempted to abide by the apostolic admonition to suffer fools gladly. However, in the end, there were just too many of them.

On Being Human

I was asked, 'In what way does human intellect differ from other animals in kind and not just in degree?' I answered, 'Only humans can ask that question.'

On Opinions

Those who say, 'That's just my opinion' rarely mean it. Those who say, 'That's just your opinion' almost always do.

IQ in Perspective

A guy once quoted to me, 'When a wise man points at a star the fool looks at his finger.'
I replied, 'True. But so does my dog and I love her dearly.
Let's not overly weigh intelligence in our assessments of worth.'

The First Principle of Information Age Political Philosophy

No person should be required to live under a body of laws, programs and policies that they consider to be fundamentally unjust.

How Markets Really Work

Perception is reality...until reality steps in and says, 'OK, enough!!!'

On the Mainstream News

Pitting a Left Wing lunatic against a Right Wing lunatic gets you a whole lot of pyrotechnics but absolutely no useful insights. You can't average them and find yourself in a defensible middle.

Knowing the Future

There has been no time in the last 200 years when the world thirty years hence was generally believable. Therefore, if someone tells you what the world will be like in thirty years and it seems reasonable, history says that they are wrong.

Make a Difference

I am interested in what you have done, what you are doing and what you will do. I am supremely indifferent to what you could do, but won't. Consequently, I don't care very much about your IQ.